It's a tax law that limits the tax deduction you can take for, well, basically sucking at investing. Invest ten grand in a partnership that buys used train cars in Germany and refurbs them to become restaurants. Yeah, it went bankrupt. The partnership raised a million in equity and four million in debt and all of it netted zero...like even the banks didn't get paid.
You can only deduct the amount that you've put in, more or less...you can't add in incremental deductions beyond your contributions. That is, you can only deduct as tax losses from investments, the capital you had "at risk."
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Finance: What is the Wash Sale Rule?14 Views
finance a la shmoop what is the wash sale rule this is the way we wash our
taxable realized profits taxable realized profit technical realize [Person washing cash]
profits okay we're done the wash sale rule is all about realizing losses from
investments gone bad such that those losses offset the gains from investments
gone good so you've had a good year in stock market you made 200 grand in
profits owning a thousand shares of Amazon from eleven hundred bucks a share
about thirteen hundred bucks a share but the fundamentals we're starting to worry [Amazon stock price graph]
you and the price just got so high you couldn't stand the stress anymore so you
sold it all of it two hundred grand of profits long-term gain because he held
it over a year looked done cashed out so that was the good part of the year
here's the bad you also invested in crapcom you put three hundred grand into [Cows butts appear]
the company at thirty bucks a share the stock stands today at ten bucks a share
while you show a paper loss of conveniently for this problem two
hundred grand you really don't love paying taxes have yet to meet a [Woman approaches politician]
politician who didn't make you feel like you need a hot shower right after so you [Women shake hands]
consider your options to mitigate your tax bill you could do nothing and pay
full taxes on the two hundred grand you made on ticker AMZN and your two hundred
in gains would net you about a hundred twenty grand after tax in a blue state [After tax profits appear]
painful to lose that forty percent of your dough that way you make a note to
yourself to rethink the wisdom of living in the high tax blue state you know
Florida in Texas looking pretty good now huh but you do have another option you
can just sell crap.com and take the loss or realize that loss and that loss of
200 grand will directly fully offset the two hundred grand of Amazon gains
well you'd be then break-even and guess what no taxes yeah but then you wouldn't
own the ten thousand shares of crapcom you wanted to own at ten bucks well if [Woman stood beside sacks of stocks]
you just sold them and then the next day bought them back you'd be good right no
well yeah it took us a long time to get here but that's where the wash sale rule
comes in that is one sale to realize losses can't just wash the sale of a [IRS agent walks up to woman holding stocks]
realized gain the IRS kind of fussy that way so
if you do sell to realize a loss that offsets again you can't just buy back
the shares the next day well but what if there were two types of craft Comstock [Box falls over]
like crap a and crap B where there were a hundred percent alike in every single
way with one and only one exception crap B is founder shares which carry ten
votes for every one of crap a and usually those traded a slight premium
like ten dollars and twenty cents this year maybe something like that
and yes the founder was paranoid about losing control over his company like [Cat hissing]
Zuck so he demanded the separate share class and then he sold his shares to buy
a yacht and attract a new wife and well now his B shares are traded in the
market and they trade for a twenty cents a share more expensive than the a shares
so not really a big deal could you sell the a shares you owned and then just buy
the B shares of crapcom the next day would that then not violate the wash [Investor walks to day 2 on timeline]
sale rule sadly no again because the shares have
to be of a completely different security that you go and buy and they can't be
just simply another class or letter grid of the same economic interest of that
share so how do you get around the wash sale rule well you don't you have to
more or less do nothing ie sit on your positions and not on the ten thousand [Person sits on a chair]
shares of crapcom for thirty days once those thirty days
have passed you can then buy crap.com and who [Woman holding 10,000 shares]
knows it may be even lower than the ten bucks a share at which you sold it maybe
nine maybe eight maybe a double that's at twenty now and you're bumming out
because you sold for tax loss reasons and maybe you shouldn't have and that's
just how the market works you roll the dice and you pay the price right that's [Dice roll on floor]
pretty much it that's the wash sale rule the second rule of course is that you do
not talk about the wash sale rule [Bar of soap appears]
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